The UK’s dominant service sector has reported its biggest drop in new orders in almost three years in July, adding to pressure on the Bank of England to cut interest rates on Thursday.
Sounding the alarm over a loss of momentum amid a worsening global economic backdrop, the data provider S&P Global Market Intelligence said total new work in the sector, which accounts for about 80% of the economy, eased to the slowest pace since November 2022.
The survey of 650 companies in the sector, which includes finance, IT, communications and property but excludes retail, is closely watched by the Bank and the government for early warning signs from the economy.
Threadneedle Street is widely expected to cut borrowing costs at its next policy meeting on Thursday from the current level of 4.25% amid growing concerns about the strength of the economy.
Financial markets put the odds of a quarter-point reduction at 95%, amid rising unemployment and the hit to global trade from Donald Trump’s fresh round of import tariffs unleashed last week.
Tim Moore, economics director at S&P Global Market Intelligence, said: “Risk aversion and low confidence among clients were the main reasons provided for sluggish sales pipelines, alongside an unfavourable global economic backdrop.”
The survey showed that subdued sales pipelines and concerns about the rising cost of doing business led to an accelerated pace of job shedding, continuing a downward trend in employers’ hiring intentions.
The headline purchasing managers’ index for the services sector dropped to 51.8 in July, from 52.8 in June. A reading of 50.0 separates growth in output from a fall in activity.
Highlighting weakness in the UK jobs market, the employment index fell to 45.6 from 47.0, the lowest reading since February.
Moore said: “Hiring trends were especially subdued, with total workforce numbers decreasing to the greatest extent since February. Worries about rising payroll costs were cited as the main factor holding back recruitment.”
Business leaders have issuing warnings that measures in Rachel Reeves’s first autumn budget, including a £25bn rise in employer national insurance contributions (NICs) and 6.7% increase in the minimum wage, would hit jobs and growth.
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Official figures show that unemployment rose to a four-year high of 4.7% in the three months to May, while the economy shrank in both April and May.
Matt Swannell, chief economic adviser to the EY Item Club, said it was “almost certain” that the Bank’s monetary policy committee would cut interest rates on Thursday.
“With the MPC balancing signs of fragility in the labour market against evidence of lingering inflationary pressure, the committee will likely signal that further gradual interest rate cuts remain appropriate.”